12 June 2014

Law in Plain English: Clark v. Rameker


This is one in a series of posts designed to describe court decisions in plain English. For more detail and background on the legal issues, see the link to the case below. For similar posts, click here.

SCOTUSblogClark v. Rameker

Argument: Mar 24 2014 (Aud.)

Why did the Supreme Court take this case? In this case, the Seventh Circuit held that individual retirement account that a debtor has inherited are exempt from the debtor's bankruptcy estate. On the other hand, the Fifth Circuit ruled in an earlier case that such payments are subject to taxation. So-called "circuit splits" are perhaps the most common way cases make it to the Supreme Court.

Discussion: At her death, Ruth Heffron owned an IRA worth approximately $300,000. Ruth's daughter Heidi Heffron-Clark was the designated beneficiary. Ruth's account passed to Heidi. When Heidi and her husband Brandon initiated bankruptcy proceedings, they sought to protect the inherited IRA pursuant to 11 U.S.C. § 522(b)(3)(C) and (d)(12), which exempt retirement funds from creditors' claims in bankruptcy. The bankruptcy judge held that an inherited IRA does not represent "retirement funds" in the hands of the current owner and so is not exempt. The District Court reversed, adopting the view that any money representing "retirement funds" in the decedent's hands must be treated the same way in successors' hands. The Seventh Circuit reversed the District Court, finding that inherited IRAs represent an opportunity for current consumption, not a fund of retirement savings.

Issue: The question before the Court is whether an individual retirement account that a debtor has inherited is exempt from the debtor's bankruptcy estate under Section 522 of the Bankruptcy Code, 11 U.S.C. § 522, which exempts "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation" under certain provisions of the Internal Revenue Code.

Holding: In a unanimous decision, the Supreme Court ruled that funds held in an inherited IRA account are not "retirement funds" within the meaning of the Bankruptcy Code.
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